Some Exceptions to the Rule

Two states, Virginia and New York, have ruled that if your only nexus with their state is as a 3rd party seller (where another company, in this case, Amazon, handles all the fulfillment and logistics), then you do not have to collect sales tax in the state.

Arizona also recently issued two letter rulings that, though they do not mention Amazon FBA by name, seem to apply.

Arizona has a transaction privilege tax (TPT) rather than a sales tax, which means that the tax is on “doing business” in the state rather than on the sale of goods and services in the state.

While sales tax experts currently disagree, the letter rulings appear to state that if retailers are only doing business in Arizona as 3rd party sellers then they do not need to collect sales tax.

Product Taxability, Explained

Once you’ve determined that you have nexus in a state, your next step is to determine if what you are selling is taxable.

Generally, tangible personal property is taxable while services are not taxable. Of course, as with everything having to do with sales tax, individual states may make exceptions to these two general rules.

Some common product categories are not taxable or taxed differently in some states. These categories include groceries, clothing and textbooks.

For example, clothing and grocery items are both non-taxable in Minnesota. In Tennessee, grocery items are taxable, but taxed at a reduced rate of 5%.

The more you sell in a state, the more often that state wants you to file a sales tax return.

If your sales dramatically increase or decrease as time goes by, your state may assign you a new filing frequency.

Always be on the lookout for letters or other communications from your state once you’re registered for a sales tax permit.

How to Collect Sales Tax on Amazon

Now that you are registered to collect, your next step is to ensure you are collecting sales tax from your Amazon FBA customers.

Fortunately, Amazon has a very robust sales tax collection engine.

Once you tell it what you want to collect, it will collect the right rate, even keeping up with complicated concepts like whether a state is “origin-based” or “destination-based,” or if a sales tax rate has changed.

It will also allow you to add “product tax codes” so you charge the right amount of sales tax on items like groceries and clothing, and allow you to choose whether or not you charge sale tax on shipping and gift wrapping.

Keep in mind that Amazon charges 2.9% of each transaction in order to collect sales tax.

The alternative, however, is not to collect sales tax from your Amazon customers and to instead pay out of your profits.

Here you can choose in which states you want to collect sales tax, as well as if you want to collect sales tax at the county and other local level. You can even enter a custom sales tax rate. We don’t recommend this because sales tax rates are subject to change frequently.

Note that you’ll need your state sale tax registration number before Amazon allows you to set up sales tax collection.

This is a safeguard to prevent sellers from unknowingly (and unlawfully!) collecting sales tax without be registered with a state.

Setting Up Product Tax Codes on Amazon FBA

From here, you can choose the product tax codes that most closely fit your products. Here are some examples:

A_CLTH_GEN: General clothing. Keep in mind that clothing is non-taxable in some states. But in many cases, accessories, formal wear, athletic wear and other clothing types are still taxable. That’s where there are also separate product tax codes like A_CLTH_HBAGS for handbags and A_CLTH_CSTUMS for costumes.

A_FOOD_GEN: Use this to label food items. Just like with clothing, not all food is taxed equally, so there are also product tax codes for things like A_FOOD_CNDY (candy) and A_FOOD_SFTDK (carbonated soft drinks.)

If you can’t find a product tax code for one of your products, that’s probably because it is generally always taxed. You should just label that item with “A_GEN_TAX.” And if, for some reason, you never want to charge sales tax on a particular item, you can also label it with “A_GEN_NOTAX.”

PRO TIP

If you sell on other platforms aside from FBA, make sure you are collecting sales tax from buyers in your nexus states on all of your shopping carts and marketplaces.

Once you have nexus in a state, you are required to collect sales tax from all buyers in that state, no matter how you make the sale.

How to Report and File Amazon FBA Sales Tax

Now you’re all set collecting sales tax from your Amazon FBA sales are chugging along.

Soon enough, a sales tax filing due date will roll around.

From here, you need to report how much sales tax you’ve collected from customers in each state, and file your sales tax returns.

Reporting Amazon FBA Sales Tax Collected

The vast majority of states want to know not only how much sales tax you’ve collected in the state, but also how much you collected from buyers in each county, city and other special taxing district within the state.

You can find this information in two ways:

Download a report form Amazon: Login to Seller Central and click Seller Central > Reports > Payments > Generate Date Range Report. Choose the filing period. From here you can try to slice and dice your info to figure out how much sales tax you collected in each state, city, county, and other jurisdiction. Beware – it’s time consuming to try and figure out which taxing districts each of your customers lives in.

Use sales tax automation: Use a sales tax automation solution to generate a report for you. A sales tax automation will connect with all of your shopping carts and marketplaces, not just Amazon to give you a comprehensive report of all the sales tax you collected from buyers within a state. It will also break down how much sales tax you’ve collected in each county, city and other taxing jurisdiction so you don’t have to spend time with maps and tax tables.

Once you’ve reported how much sales tax you collected in a state, it’s time to file your sales tax returns and remit the sales tax you collected.

Filing Amazon FBA Sales Tax Returns

You can file your sales tax returns in a couple of ways.

Online: Login to your state’s taxing authority website and submit a sales tax return. Then make your payment through the state’s payment gateway.

Automatically via sales tax software: Use a sales tax automation solution to automatically file your sales tax returns and pay what you owe to the state.

And finally, keep a couple of important things in mind when filing your sales tax return.

Always file “zero returns:” File a sales tax return even if you did not collect any sales tax over the taxable period. States still require you to file by the deadline, and some of them will even levy a fine if you don’t file. If you fail to file for multiple periods in a row, they may even automatically cancel your sales tax permit.

Take advantage of discounts: A little over half the U.S. states with a sales tax allow online sellers to keep a small percentage of the sales tax you’ve collected as bit of a monetary “thank you” for your effort collecting and remitting the tax. While this is generally only 1-3% of the sales tax you’ve collected, it’s still free money!

You should now be prepared to tackle Amazon FBA sales tax. If you have questions or something to say, start the conversation in the comments section.

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Jennifer Dunn is Chief of Content at TaxJar, a service that makes sales tax reporting and filing simple for more than 7,000 online sellers. Try a 30-day free trial of TaxJar today and eliminate sales tax compliance headaches from your life.